Interest paid on home equity debt may still be deductible
The new tax law eliminated the deduction for interest paid on home equity lines of credit (also called home equity loans or second mortgages). But the interest paid on these loans may still be tax deductible if the loan meets specific requirements.
Interest paid on loans used to buy, build, or substantially improve your home is still tax deductible if the home secures the loan. For example, interest paid on a home equity loan secured by your home to remodel your kitchen may be tax deductible if the loan meets other criteria.
The loan must be secured by your home. Interest paid on loans not secured by your home is not tax deductible. Tax Trap: Interest paid on a loan secured by your primary residence used to purchase a second home (e.g., vacation home) is not tax deductible. So it is best to use the second home as security for the loan.
It gets even more complicated. The old law that allowed you to deduct interest paid on home equity loans secured by your home overrode what is called the “interest tracing rules.” For example, you may know that interest paid on your credit card is not tax deductible. But under the old law, interest paid on a home equity loan used to pay off credit card debt was tax deductible if the loan met other specific criteria. The IRS did not “trace” how you used the loan. If your home equity loan met specific criteria, the interest was tax deductible.
Under the new law, the “interest tracing rules” become more important because it may allow you to deduct interest paid on a home equity loan. For example, if you use a home equity loan to purchase a rental property, you can “trace” the interest paid to the rental property and tax deduct the interest. Tax Trap: You must make an election to trace the interest to the rental property.
Our company has experience with these rules, and we are available to assist you. Please call us at 323-285-9880 for additional information.
Disclaimer: Tax laws are complicated and your taxes are unique to you. A law favorable to you may not be beneficial to the next person because the facts and circumstances are different. Our blog posts are very broad and do not provide specific tax advice to you for which you can use for tax planning purposes. Therefore, we highly recommend you contact us before taking any action concerning the content of this post.
How to Retain Property Tax Deductions
The new tax law limits property tax deductions to $10,000 and eliminates miscellaneous itemized deductions. So you may be fussing about the loss of your tax deductions, but there is an election you may be able to make to capitalize these expenses which would be beneficial to you.
A recent tax court case highlights the strategies the IRS will take to limit your tax deductions. And the amount that is not deductible is lost forever unless you make a “carrying charges” election.
The taxpayer paid property taxes for land and reported property tax deductions on Schedule C and E (not Schedule A). The property was not rented to third parties, so the IRS argued, and the court agreed, the property taxes are reportable on Schedule A. So why does the schedule matter?
Taxes reported on Schedule A are subject to the $10,000 limitation; however, amounts reported on Schedules C and E are not. The taxpayer was deducting 100% of taxes but lost the tax deductions when the IRS moved them to Schedule A. What can you do to retain the deduction?
You can make an election to add the taxes to the property’s cost basis. You will not get a current year tax deduction, but the election will increase the property’s cost basis which will reduce your taxable gain when you sell the property. So by making the election, you have retained your tax deduction which would have been lost forever without the election.
Our company has experience with this election, and we are available to assist you. Please call us at 323-285-9880 for additional information.
Should you disclose your bitcoin account to the U.S. Treasury?
U.S. citizens and residents are required to disclose foreign bank and other international financial accounts to the U.S. Treasury if the combined balance of all accounts exceeds $10,000. The penalties for failure to file start at $10,000 and can exceed the account balance if the non-filing is willful. So what is a foreign bank account?
Accounts not maintained in the United States are foreign. So if you opened a bitcoin account administered outside of the U.S., the account is foreign. But is it a bank account?
The IRS has not published guidance for bitcoin accounts. But a federal district court recently authorized the IRS to serve a John Doe summons on Coinbase to get account holder’s names. And the IRS successfully argued in court that particular online gambling accounts are foreign bank accounts and reportable to the U.S. Treasury. In this case, the taxpayer had to pay $40,000 in penalties.
It is not clear if bitcoin accounts (or similar cryptocurrency accounts) are reportable to the U.S. Treasury. But the penalties are high, so it is best to take a cautious approach and report the account(s) to avoid paying penalties.
Our company has experience preparing foreign bank account disclosure forms and available to assist you. Please call our office at 323-285-9880 for additional information. The reports are due by April 15th.
Employee Business Expenses Still Deductible
Don’t throw away your receipts yet! Employee business expenses are still tax deductible on your California income tax return.
The new federal tax law eliminated the deduction for out-of-pocket employee business expenses. But state law still allows the deduction. The deduction can be sizable if you are in a high tax bracket. The highest state tax rate is 13.3% which includes the mental health services tax. For example, assuming you can deduct $10,000 for business expenses, your state taxes would be $930 less if you are in the 9.3% tax bracket.
Did you get a letter from the Franchise Tax Board? The FTB is mailing letters to taxpayers who have deducted employee business expenses. The mailing reminds taxpayers of their responsibility to file accurate tax returns, deduct only allowed out-of-pocket costs, and maintain adequate receipts. If you get a letter, the FTB believes you are deducting amounts higher than they expect to see on your tax return. They are not auditing your tax return. But receiving this letter could be a warning of a possible audit. Shown below is a list of common problems with this deduction.
- Your employer may have a reimbursement policy. Tax rules will not allow you to deduct expenses that are reimbursable by your employer regardless of whether or not you file an expense report requesting reimbursement. If you are audited, the auditor will request a copy of your employer’s policy and may contact your employer to verify the policy is valid.
- Driving to and from your office and home are commuting miles which are not tax deductible. Special rules apply to taxpayers who qualify for the home office deduction.
- Clothes and uniforms not required by your employer are not tax deductible.
- No receipts or mileage logs to prove your deductions.
Remember to keep your receipts, ask your employer for a copy of the reimbursement policy, and maintain a log that records your business miles that were driven and the purpose of your trip.
Where did the marriage penalty go?
The federal “marriage penalty” affects couples whose combined taxable income exceeds $600,000. These couples pay 37% tax on income that exceeds this amount. However, two individuals filing separate returns would not be taxed at 37% until their combined income exceeds $1 million. This phenomenon is called the “marriage penalty.” Under the old law, the penalty applied to couples whose combined taxable income exceeded $156,150.
California does not have a marriage penalty based on tax brackets. But the state’s mental health services tax penalizes couples whose combined taxable income exceeds $1 million. At this level of income, married couples pay more health services taxes compared to individuals because California law does not increase the $1 million amount to $2 million for couples. So the taxable income for two individuals filing separate returns can be $2 million before paying the tax.
In some cases, California Registered Domestic Partners will pay less tax than either married couples or individuals who are not married.
Our firm assists clients with pre-marriage tax planning, and we are experts at tax planning for Registered Domestic Partners. Call us at (323) 285-9880 or send us an email if you have tax planning questions.
You may be under-withheld!
The new tax law lowered income tax rates and eliminated exemptions. It also reduced the state income tax deduction to $10,000 (max) and eliminated deductions for employee business expenses not reimbursed by an employer.
IRS withholding tables issued on January 11th reflect the lower tax rates and no exemption deductions. But the charts do not factor the loss of employee business expenses and state income tax deductions. So you may not be paying enough tax with your withholdings and could owe more money than you expected with the filing of your 2018 tax return.
The IRS will publish an income tax calculator in February which will allow employees to adjust their withholdings so their taxes are not under (or over) withheld. Congress gave the IRS one year to fix the withholding tables to conform to the new laws. So you may need to take action now to ensure you do not have a significant balance due when you file your income tax return.
Also, employees paid bonuses, stock options, and commissions are at risk of under-withholding because the withholding rate for this income is now 22% (formerly 25%).
And remember penalties still apply to underpaid taxes. The penalty rate is currently 4%.
We will post a link to the income tax calculator on our website when the calculator is available. Contact us if your tax situation is complicated. We have the knowledge and skill to calculate complicated income tax projections. Call us at (323) 285-9880.
It is still early in the year, so now is the time to find out if you are underpaying your taxes. You will have the rest of the year to pay taxes with increased withholdings.
2018 Tax Season Begins January 29th – Returns Due April 17th
The IRS will begin accepting all Individual tax returns on January 29th. Approximately 155 million individual tax returns will be filed this year. The tax deadline is April 17th.
The deadline is Tuesday, April 17, 2018, rather than the traditional April 15th date, because April 15th is a Sunday and April 16th is Emancipation Day in Washington, DC. Under the tax law, legal holidays in the District of Columbia affect the filing deadline.
We are ready to assist you with your tax returns. Please contact us ASAP! 323-285-9880
Forms 1099-Misc; Filing Deadline & Penalties
Businesses have less than 30 days to file Forms 1099-Misc with the IRS and recipients. The due date is Wednesday, January 31st. Penalties for late or not filing are $520 per recipient. Not all payments to vendors are reportable to the IRS such as payments that are less than $600 per recipient and amounts paid to some corporations. Amounts paid to partnerships and limited liability companies are reportable to the IRS.
The maximum penalty amount is $3,218,500 or $1,072,500 if your company meets certain criteria. Yes, that’s right, $3 million or $1 million. These numbers are not typos!
We are currently contacting our business clients to gather information to comply with this filing requirement. Please send me an email or call us at (323) 285-9880 if we can be of assistance to you.
David A. Paddock, CPA, M. TAX.
New Tax Laws (2018)
Commentary about the new tax laws is fast and furious. We would give you quick answers about the computation of the new business deduction, a possible change in tax status, and other unintended effects if this information were available. As your trusted adviser, we cannot give you quick answers that are relevant to you because everyone’s tax situation is unique to them.
Based on commentary, there may be changes to the types of businesses which qualify for the 20% deduction. The ABA, AICPA, and AMA (attorneys, accountants, and doctors) are very vocal with their disapproval on the restrictions of the tax rate decrease to owners of service industries ($315,000 of taxable income). We are hoping for changes. (One suggestion – consider increasing your retirement plan contributions to decrease your tax rate.)
The law eliminated exemptions. The IRS is still trying to change instructions for Form W-4 and the withholding tables. The rule makers have not started analyzing the changes in tax filings and rules resulting from the new act. So we do not have their interpretations, examples, and guidelines for implementing the new law.
Most of the changes apply to tax years beginning after December 31, 2017. Quick answers are not always the right or most correct answers. We are studying the new law and will be posting to our website and sending out updates to our social media channels.
Please contact us if you would like to conduct a more in-depth analysis of the tax implications for you.
Happy New Year!
“Associated-With Meals”: Is your business meal tax deductible?
Taking a customer or business colleague to lunch or dinner before or after a business meeting is what the IRS calls an “associated-with” meal because the meal occurs before or after the business meeting. The IRS says the meal must have a “clear business purpose”. In addition, the primary purpose of the meeting is to conduct business and the business discussion is substantial in either importance or the amount of time spent talking about business. “Associated-with” meals and “directly related” meals are evaluated differently by the IRS which makes it easier to qualify goodwill meals as tax deductible expenses using the “associated-with” requirements. (See last week’s blog post for more information about “directly related” meals.)
The IRS looks at “associated-with” meals separate from the business meeting that occurred before or after the meal. The purpose of the meeting must be primarily for business and there must be an expectation of getting income or some specific business benefit. But the meal itself (before or after the meeting) must meet a lower standard of having a clear business purpose. Goodwill meals with clients meet the clear business purpose standard. Therefore, to increase your chances of getting your tax deductible meal approved by the IRS, you should have a business meeting before or after the meal.
Remember to keep your receipts, in addition to a record of business purpose, to prove to the IRS the meal expense is related to your business. No receipt and no record = no tax deduction.
Please contact David Paddock if you have any questions about this post or other audit-readiness matters.